Madoff trustee loses appeal on clawbacks

Victims of Bernard Madoff's fraud may recover less money than they had hoped after a federal appeals court limited the ability of the trustee liquidating the swindler's firm to recoup "fictitious profits" and other transfers from other customers.
The 2nd U.S. Circuit Court of Appeals in New York on Monday said federal bankruptcy law did not let the trustee Irving Picard recoup a variety of securities-related payments that Bernard L. Madoff Investment Securities LLC made to customers before it collapsed on Dec. 11, 2008.

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"Permitting the clawback of millions, if not billions, of dollars from BLMIS clients - many of whom are institutional investors and feeder funds - would likely cause the very 'displacement' that Congress hoped to minimize," Circuit Judge Barrington Parker wrote for a three-judge panel. "The interpretation pressed by the trustee risks the very sort of significant market disruption that Congress was concerned with."
A spokeswoman for Picard had no immediate comment.
Picard, who has recouped about $10.5 billion, had sought the ability to claw back money sent to various customers in the six years before Madoff's firm went bankrupt.
Those customers, in contrast, said federal law
limited Picard to recoup money only from the last two years, and only if payments were made with fraudulent intent.
They claimed not to have known Madoff was a fraud, and that taking money from them would provide a windfall to others.
"I am delighted," Richard Levy, a Pryor Cashman partner representing some of these customers, said about the decision in a phone interview. "It will benefit so many people."
The case turned on a "safe harbor" provision of the U.S. Bankruptcy Code that protects customers who receive transfers from stockbrokers that are made "in connection with a securities contract" or are "settlement payments."
While Madoff did not trade securities for many customers, U.S. District Judge Jed Rakoff in Manhattan ruled in a series of cases in 2011 and 2012 that transfers made more than two years before the bankruptcy could not be clawed back by Picard.
Picard's lawyer, David Sheehan, had argued that Madoff's shenanigans simply involved moving money from one customer to another, and was not what Congress meant to regulate.
The cases are Picard v. Ida Fishman Revocable Trust et al, 2nd U.S. Circuit Court of Appeals, Nos. 12-2497, 12-2500, 12-2557, 12-2616, 12-3422, 12-3440, 12-3582 and 12-3585.